What is a Controlled Group? (Benefit Minute)

Posted in: Benefit Minute, Employee Benefits

When several entities (whether incorporated or unincorporated) share common ownership, a controlled group or common control may exist.  For many IRS benefit plan purposes, a controlled group is treated as a single employer.  For example, the determination of an employer’s size for purposes of COBRA, Medicare Secondary Payer rules and the ACA’s Applicable Large Employer status are determined on a controlled group basis.  IRS non-discrimination testing is generally performed on a controlled group basis.  This Benefit Minute provides a high level overview of controlled groups.

The controlled group rules can be found in sections 414(b) and 414(c) of the Internal Revenue Code.   Section 414(b) applies to corporations while 414(c) applies to trades or businesses such as partnerships.  The types of controlled groups are parent-subsidiary, brother-sister or a combination of both.


A parent-subsidiary controlled group exists when one entity (the parent) has a controlling interest in one other entity (the subsidiary) or several other entities.  For this purpose a controlling interest is defined as 80% or greater interest in stock, voting power, profits, interest or capital interest (depending on the type of entity).  A parent-subsidiary controlled group can also consist of a chain of businesses connected by ownership.  In this case, a subsidiary of one entity can also be the parent of another entity by virtue of at least 80% ownership.


A brother-sister controlled group exists when the same five or fewer individuals or entities satisfy the following ownership requirements:

  • Together own 80% or more of each entity (total ownership); and
  • Own more than 50% of each entity when taking into account only the smallest ownership percentage of each individual in any entity being considered (effective ownership).

This concept can best be illustrated by the following example which shows that Company B and Company C, but not Company A, are a brother-sister controlled group with total ownership of 95% in each entity and effective control of 55% (percentages shown in bold).


Company A Company B Company C
# 1 20% 40% 20%
# 2 5% 10% 40%
# 3 25% 45% 25%
Total 50% 95% 95%


Combination Group

A combination controlled group consists of three or more entities whereby each entity is a member of either a parent-subsidiary controlled group or a brother-sister controlled group and at least one entity is the common parent and also a member of a brother-sister group.

Ownership Attribution Rules

When determining ownership or interest percentages, family member constructive ownership rules apply.  For example, in many cases, an individual is considered to own stock that is owned directly or indirectly by or for a spouse or a minor child.  In addition, Section 1563(e) of the Internal Revenue Code has constructive ownership rules for stock options and for interests in partnerships, estates, trusts and corporations.

Not-for-Profit Entities

Similar controlled group rules also apply to not-for-profit entities based on board control.  Common control exists between an exempt organization and another organization if at least 80% of the directors or trustees of one organization are:

  • On the board of the other organization;
  • Employed by the other organization; or
  • Can be removed and replaced as a board member or trustee by the other organization.

Affiliated Service Groups

Even without the requisite ownership percentage, entities may be treated as a controlled group under the affiliated service group rules.  These rules can be found in section 414(m) of the Internal Revenue Code. Affiliated service groups are, in general, a group of businesses working together to provide services to each other or to common customers.  They generally arise in the personal services industries, but can also arise when one entity performs management-type functions for one or more other entities.

For example, ABC Partnership is a law partnership with offices in numerous cities.  EFG P.C. is a corporation that is a partner in the law firm. EFG P.C. provides paralegal and administrative services for the attorneys in the law firm.  All of the employees of the corporation work directly for the corporation, and none of them work directly for any of the offices of the law firm.

Since the corporation is regularly associated with the law firm in performing services for third parties, together they constitute an affiliated service group, even absent the requisite ownership interest needed for a controlled group.  The employees of both entities must be treated as if they were employed as a single employer for many benefit plan purposes.

This Is Complicated

Controlled group rules are complex and the analysis is detailed and cumbersome.  It requires a complete understanding of all entities that may be related and all ownership interests of each entity.  In some cases, entities that are related may not even be aware that each other exist.  Entities that are uncertain whether the controlled group rules apply need to consult with an attorney or tax accountant who is familiar with the rules and can perform the analysis.

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